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Herbalife Ltd. (HLF) Q4 Earnings Preview: Highly Anticipated Bull Versus Bear Showdown – Who Wins?

 February 19, 2013 09:44 AM

(By Rich Bieglmeier) Herbalife Ltd. (HLF) will release its fourth quarter 2012 financial results after the close of trading on the NYSE on Tuesday, February 19, 2013. The following day, Wednesday, February 20, 2013 at 8 a.m. PST (11 a.m. EST), Herbalife's senior management team will host an investor conference call to discuss its recent financial results and provide an update on current business trends.

Wall Street anticipates that HLF will earn $1.03 for the quarter. iStock expects the nutritional supplement company to report earnings that will hit Wall Street's consensus number. The iEstimate is $1.03, too.

[Related -Herbalife Ltd. (HLF) Q3 Earnings Preview: What To Watch?]

Herbalife is a network marketing company, sells weight management, nutritional supplement, energy, sports and fitness, and personal care products worldwide. It offers science-based products in four principal categories: weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition.

HLF has been and is the subject of a big battle between high profile hedge funds. Bill Ackman of Pershing Square Capital Management L.P. says it is a pyramid scheme and has a price target of zero – you read that right – zero. Meanwhile, hot shots like Carl Icahn and Dan Loeb think Ackman is wrong and are taking the other side of the trade – something has to give!

With the ongoing hedge fund war raging, iStock would anticipate that Herbalife's stock price will react violently, one way or the other following Tuesday's announcement. HLF management has handled Wall Street's profit expectations marvelously as the company has topped the consensus for at least 16 straight quarters. That average surprise has been 15.21% with a max of 42% and a min of 1.47%.

[Related -How To Invest Like Bill Ackman]

The controversial company's stock price performance in the days surrounding earnings has been nearly as impressive as actual results. Twelve of the 16 quarterly checkups rewarded investors with gains up to 24.8%, as little as 0.90% with average increases of 9.54%. The quartet of haircuts includes a pair of debacles, losing 29% and 34%, and two trims of 2.1% and 2.2%.

In Q3, Herbalife's sales grew by 17.3% worldwide for the Three Months Ended September 30, 2012. China provided the fastest growth at 41% but accounted for the smallest slice of the pie. Obviously, China offers enormous upside and sort of an insurance policy against more mature markets.

However, all of HLF's six regions grew by at least 9.9% during the 3rd quarter with the biggest, Asia ex-China, jumping by 17% and the USA tacking on 13.6%.

We turned to Google Trends to find hints – hopefully - to see how Q4 stands up. According to Ackman and HLF, shakes are the top selling product for Herbalife. So, we punched in the keyword "Herbalife shake." If Google Trends are accurate, then Q4 will look a lot like Q3, but much better than Q4 2011. Quarter-over-quarter (QoQ), queries were flat but skyrocketed year-over-year (YoY) by 72%.

Three months ago, HLF earned $1.04 pre-share and $0.86 a year ago. Flat QoQ searches and actual earnings line up nicely; however, YoY numbers suggest something a little better could be on tap.

Ackman contends that Herbalife makes the majority of its money selling products to distributors. There weren't enough queries to register in 2011, and QoQ numbers either make the bear case or destroy it; honestly, we aren't sure. Googles for "Herbalife distributor" are down 20.7% QoQ, with large swaths of inactivity. If the number of new distributors stalled and earnings still do well, that could minimize Ackman's argument to some degree. On the other hand, if distributors fall and profits go with it, can you hear an "I told you so" coming from Pershing Square?

iStock is going to watch accounts receivables (AR) and inventory on Tuesday. For the first nine months of the year, Herbalife's sales increased by 17.5%, but, in what can be an unwelcome sign, AR grew by 27.3% and inventory by 26.7%. Perhaps, the pair outpacing sales is a sign that distributors aren't selling as much product as hoped?

Overall: History suggests that Herbalife Ltd. (HLF) is likely to top the consensus number, again. They better, or the short-sharks are likely to smell blood in the water. However, a solid beat coupled with strong guidance, and with 34.80% of HLF's float (stock available for trading) sold short, HLF could fly.

No matter what, Herbalife's announcement will be one of the most entertaining to watch.



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